The second problem is that the government is hypocritical – this
is noted in a new paper published by the IEA. On the one hand, the
government likes to criticise tax havens as “sunny places for shady people”, a
phrase regularly used by one senior minister. Simultaneously, the government is
building Britain up to be a tax haven itself. The following three statements,
for example, come directly from George Osborne (in the latter case from a
Treasury document rather than from his mouth directly):

“We are building the most competitive tax system in the world.”

“I am delighted that Star Wars is coming back to
Britain. Today’s announcement that the next Star Wars film will be shot and
produced in the UK is great news for fans and our creative industries, and it
is clear evidence that our incentives are attracting the largest studios back
to the UK. I am personally committed to seeing more great films and television
made in Britain.”

“The Patent Box will encourage companies to locate the high-value
jobs and activity associated with the development, manufacture and exploitation
of patents in the UK. It will also enhance the competitiveness of the UK tax
system for high-tech companies that obtain profits from patents.”

The government is doing precisely what it is accusing “shady
places” of doing. It is not only – quite justifiably – reducing corporation
tax, it is creating deliberate tax avoidance schemes so that mobile
international businesses – such as film making and those involving technical
patents - will move their activities to Britain in order to avoid tax in other
countries.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

Nigel Lawson
once said that the NHS is the closest thing the English have to a religion. Of
course, we also have the established church. And, indeed, the established
church seems to see the NHS as part of its theology. Last week, Archbishop
Welby, at his enthronement, said: “Slaves
were freed, Factory Acts passed, and the NHS and social care established
through Christ-liberated courage.” In their response to the Mid Staffordshire NHS
scandal the local bishops of Lichfield and Stafford said: "We
have now seen what many of us suspected - that the marketisation of the health
service has gone too far…This Christian basis has been weakened in recent years
and covering the bottom line has become all important."

This is a
totally inappropriate response to the deaths of 1,200 people in a state-run
health system. It is quite extraordinary to blame the scandal on the marketisation of
healthcare in the UK. Indeed, by almost every measure, the UK has amongst the
least marketised health systems in the world (along with Iceland and Canada).
For example, 4 per cent of UK hospitals are not publicly owned compared with 26
per cent in Spain, 51 per cent in Germany and 34 per cent in France. Many of
these non-state hospitals in other countries are operating within
state-financed health systems which Anglican bishops would describe as
“marketised” state systems (though there is generally a much higher level of
private insured funding too). If the Bishops were right, surely France and
Germany should be experiencing a Mid Staffs scandal each week.

If
you look at mortality amenable to healthcare, the UK has amongst the worst
records in the EU, some way behind countries with more marketised health
systems. It is worth noting, however, that the figures of mortality amenable to
healthcare fell more rapidly in the UK than in any other OECD country apart
from Ireland during the period 1997-2007 – this is the period when the UK
government began to introduce some limited marketisation (though not, I
believe, in Mid Staffs hospital). But, of course, if the NHS is your religion,
then evidence is not relevant to the debate – for some, the NHS is an article
of faith.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

A thriving economy needs saving and capital investment. Capital investment is inherently risky because it involves making a judgment about returns from entrepreneurial ventures when our knowledge about the future is always limited. Any saving that leads to capital investment must therefore lead to risk. While risk can be managed and reduced (for example, by diversification), in general it is only possible for a saver to bear less risk if some other party bears more. For example, when we put our money in a bank, the level of risk is very low because the shareholders of the bank take the first hit if borrowers do not repay their loans. However, the extent to which we can offload risk like this is limited and, because all savers are ultimately households, such mechanisms merely switch risk from one household to another.

Despite this, successive governments have tried to eliminate risk in financial services. Conservative governments have been particularly guilty. It was a Conservative government that hugely increased the regulation of life insurance companies though the Insurance Companies Act 1982. The current government is also going through with the implementation of “Solvency II” which is an incredibly complex method of tightly regulating insurance companies. This is being promoted by the British and will be imposed on all EU companies. Incredibly, the promoters of that agenda have boasted that it replicates the Basel approach to regulating banks (which was shown to be a huge failure). Conservatives introduced the Financial Services Act 1986 (which moved the responsibility for regulation of financial markets from institutions that developed within the market to the government) and they introduced the 1995 Pensions Act. Conservatives are also trying to make banks not only failsafe (i.e. put them in a position where they fail safely – a very good idea) but also trying to ensure that they hold so much capital that they never fail.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

Those attacking companies not paying corporation tax have opened up a new line of argument. Specifically, members of the House of Commons’ Public Accounts Committee have argued that because companies benefit from all the things on which governments spend money, they should pay more in taxes. This precisely replicates President Obama’s statement before the US election: “If you've got a business - you didn't build that. Somebody else made that happen.” He was referring to government-paid teachers, infrastructure and so on.

First of all, let us look at who it is that actually pays taxes and on what. It is as meaningless to complain about “companies” not paying taxes as it is to complain about “vehicles” not paying road taxes. Companies’ owners pay taxes. Taxes are paid by owners on the return on their capital and on the additional profits from entrepreneurship. It is also notable that some shareholders are not supposed to pay taxes – pension funds, charities, people on low incomes, and so on. Regrettably, Gordon Brown, in his 1997 Budget, ensured that such people do pay tax by preventing them from reclaiming corporation tax on dividends, and it is worth considering whether this is one of the reasons that companies are increasingly trying to escape tax. Non-taxpayers do not pay tax on returns to other forms of capital. If companies’ owners are at least partly made up of non-taxpayers then it is not surprising that companies try to preserve their owners’ non-taxpaying status by using tax havens.

But, what of the argument that companies should pay tax to finance the services that make it possible for them to operate and that, by avoiding tax, they are getting all the goods and services the government provides for free?

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

Earlier
this week, a group of leading academics called for a revolution in financial
regulation. This call came after the publication of a group of papers examining
regulation across every field of financial services. A revolution - in the
proper sense of the word - takes you back to where you should be. This is what
should happen with regard to financial regulation.

It
is commonly thought that we have seen a huge liberalisation in financial
regulation in recent years and that this was responsible for the financial
crash. Across most sectors, this really is not true – certainly in the UK.
Until we entered the EU, there was virtually no specific regulation of
insurance companies. There was, however, in the case of life
insurance, an excellent but simple law that facilitated the orderly
winding up of insurance companies and which required disclosure. We have now
moved to very prescriptive regulation of both the sales of financial products
and of insurance companies themselves. This regulation is about to get tighter
through the introduction of Solvency II in the EU. The UK often blames the EU
for over-regulating our businesses, yet this dreadful piece of regulation is
British born and bred. In its present form, the academics who signed the
statement argue that Solvency II will damage insurance companies and may well
lead to financial contagion and sow the seeds of future crises. The reason for
this is that it will strongly encourage all insurance companies across Europe
to invest in similar assets and strongly encourage investment in government
bonds – hardly a safe haven.

Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs and Professor of Insurance and Risk Management at Cass Business School.

After reforming student finance, the UK Government
now wishes to liberalise the higher education sector. The rationale is simple.
If the Government is paying less of the cost of higher education and students
are paying more, then the sector should be more responsive to students.
Students will be paying the bills so they should be taking the decisions as to
where they go to university and how they study. Why restrict their options to
the currently established universities and why exclude profit-making
institutions?

The Government is also trying to put different
types of higher education on a similar footing so that there is now a less
clear division between part-time and full-time courses from the point of view
of student support. Given this, it would seem illogical to keep out of the
university sector the private sector, profit-making institutions that have
traditionally served so well those who are taking part-time courses whilst
working in a profession.

Philip Booth is Editorial
and Programme Director at the Institute of Economic Affairs and Professor of
Insurance and Risk Management at Cass Business School.

Once again,
we hear calls for a wealth tax not just from Nick Clegg and Simon Hughes, but
also from Tim Montgomerie.

These calls
cannot go unchallenged. A wealth tax is a pernicious tax because it taxes the
same wealth year after year after year. It is double taxation and an attack on
property rights far greater than the attack on property rights that comes from
taxation in general. A wealth tax specifically targets only income that people
choose to save and invest and build up into a store of property and assets.
Earn £0.2m and spend it on a luxury cruise and some entertainment packages at
the Olympics and you avoid the tax; earn £0.2m and invest it in a business and
you pay the tax. It is as simple as that. The income out of which the taxed
wealth is accumulated has, of course, been taxed already.

It would be churlish to do anything other than praise the technical brilliance of the Olympic opening ceremony. The choreography and the execution by both the professionals and volunteers were terrific. The whole atmosphere of spontaneity also hit the right notes. Despite this, the content was highly questionable. We know from the IEA/Liberty Fund publication The representation of business in English literature that there is a subtle anti-business bias in literature and the arts. This was certainly apparent at the opening ceremony.

We start with a rural idyll with well-dressed people playing happily in the countryside. They are then ripped from their roots as the horror of the industrial revolution takes place. There is no sense of the uncertainty, dreadful poverty, disease and malnutrition of rural living of the time giving way to migration to cities to lead a better life where, despite the difficulties, many more people had food on the table and some degree of certainty.

I was beginning to feel quite warm towards Michael Gove’s plans for more varied qualifications within schools, and then I thought more about the detail. It seems that the proposals to bring back the O-level involve potentially highly damaging government intervention in the education system – and that is a bad starting point for any reform.

Over the last couple of decades we have seen the gradual nationalisation of curricula and examining boards. Under the influence of the governments of the 1990s, boards producing most of the exams ceased to be run directly by universities with a strong interest in the quality of qualifications and, in some cases, became run by commercial organisations. There is nothing wrong with this in principle. However, at the same time, the Government introduced league tables based on high-level summary measures of performance in the new government-imposed examinations.

There is almost an exact analogy here with what went wrong with the credit rating agencies and their rating of bonds before the financial crisis. Bond ratings were used to determine banks’ regulatory capital and the agencies had an incentive to focus not on the quality of the rating process but on ensuring that there was a high rating – their incentives were distorted with serious consequences. In education, the quality of qualifications has become secondary to ensuring that enough passes are achieved at the right level to get a school up the league tables: and the boards respond.

Personally, I think other factors are at work in the improvement in exam results as well – such as children and teachers becoming better at preparing for exams in an era where transparency demands more predictability in exam questions – but league table races are surely important in creating the “competitive race to the bottom” that Mr Gove has described. That race to the bottom, of course, has been encouraged by the Minister’s own continued and renewed focus on the very-high-level summary measure of achievement, the so-called English Baccalaureate.

It is worthwhile examining just how bad the tax and benefits system is today by taking the simplest possible case – note, the simplest possible case – of a couple with three children not claiming Housing Benefit, Council Tax Benefit or assistance with child-care costs (or a host of other ad hoc benefits that are available).

The couple will receive total benefits of £13,275 assuming that they undertake 30 hours work a week between them. These benefits are then withdrawn at a rate of 41 pence of benefit for every pound earned over £6,420 until the household income level reaches £38,798. It is assumed that this is a single-earner household (the tax and benefit position in reality depends on the way in which earnings are split between the two persons in the couple). The first point to note is that this couple receive the basic means-tested benefit until their income is almost £39,000.

The UK has been put on a credit-rating downgrade watch. This is not surprising, but one wonders whether Moody’s is focusing on the right issues. In particular, Moody’s cited the lack of growth and the troubles in the eurozone as being the main reasons for its decision. Moody’s fears that the lack of growth could come from further problems in the banking sector, very weak growth in Europe and continued private-sector deleveraging. Leaving aside the fact that it is rather strange to suggest that deleveraging (and the consequent increase in saving) could cause slow growth and a debt crisis in an open economy (a decent third-year undergraduate course on international financial economics would put Moody’s right here) these are relatively short-term issues. What of the long term?

George Osborne’s plan is to bring the government finances back into balance in the medium term and reduce government spending to just below 40% of national income. This is very worrying. By the Chancellor’s own admission, the UK government has never been able to tax its citizens more than 40% of national income. The limit of the ambitions of a Conservative Chancellor of the Exchequer appears to be to tax the British population at the maximum taxable capacity.

If we fast-forward to 2016 and assume that the government has been successful in reducing government spending to its target, then what? The likelihood is that the government will be locked into a 40 year battle just to keep spending at that level. Calculations from IEA authors about the true underlying size of UK debt caused alarm when they were first published four years ago. Now, using somewhat different methods of presentation, the Office for Budget Responsibility produces its own forecasts of the long-term pressure on government spending. They too make depressing reading.

Overall, the pressures from health spending, pensions, PFI costs, long-term care costs and so on are likely (on the central projection) to add to government spending over 5% of national income over the next five years.

Apparently, the World Economic Forum – a pre-skiing holiday talking shop for many of its attendees - exists as “an independent international organization committed to improving the state of the world by engaging business, political, academic and other leaders of society to shape global, regional and industry agendas”.

If some global business people, journalists and academics wish to waste their own money attending this conference, then I guess we would have nothing to complain about. However, the World Economic Forum, which deliberated last weekend, is also a huge magnet for politicians and public intellectuals to make grand-stand speeches and for politicians to mix with and exchange ideas with major business leaders. It is, in other words, a perfect environment for “crony capitalism” to flourish. Will small businesses be there to make the case against the expansion of regulation such as the EU temporary workers directive? Of course not. They will be hard at work trying to make a living in an increasingly hostile economic climate. David Cameron says that he wants to root out crony capitalism. He should therefore have boycotted Davos.

But, the main objection to Davos must surely be the hubris of those involved. We do not need the “global industry agenda” shaping by self-appointed experts. Industry is shaped by the dispersed decisions of seven billion consumers and millions of businesses. Industry is shaped from the bottom up and not from the top down. Davos attendees would do well to take note of Hayek’s appeal to economists: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”. How little we know is perhaps indicated by the Davos Reports on risk at the 2007 meeting. I could not find any concern about risks within the banking system – bird flu was the main worry.

Thirty years ago, the economics profession was dominated by naive Keynesians. The author of the standard textbook at the time, used by the majority of A-level students and first-year undergraduates, argued that the misery of the 1930s depression would have been much reduced had those in authority known even as much economics as was contained in his book. This so-called economics involved the belief that an increase in saving and taxation or a reduction in government spending necessarily reduced national income. The author stated that there was no space to discuss alternative “extreme” views in his 810 page book. On 23rd March 1981, 364 economists took their cue from the textbooks and wrote to The Times strongly criticising fiscal retrenchment and arguing that: “present policies will deepen the recession.”

Naive Keynesianism should have been buried that year. Within a few weeks, economic data was released that showed that the letter was written in the very month that domestic demand recovered. Most economists have moved on but there are remaining habitats of naive Keynesianism in the Financial Times, the BBC and the upper-reaches of the Labour Party.

Lord Wolfson recently announced a prize for academic economists who came up with a plan for an orderly exit of one or more countries from the euro with a closing date of 31st January 2012.

I am convinced that the problem is more urgent than is implied by Lord Wolfson’s deadline so, at the risk of giving up the opportunity to win a handsome cash prize, I am revealing my plan today.

So, what are the options?

The obvious approach is for eurozone leaders to meet and decide to break up the euro. This is extremely tricky. Before the meeting, blanket capital controls would have to be put tightly round all countries which might leave. These would have to be rigidly policed, yet there would be no time to prepare – there could not be a single second’s notice given. A plan for reintroducing national currencies across a number of countries would have to be hatched rapidly and the EU constitution would have to be changed. Laws in member states requiring ratification by referendum would have to be over-ridden. This is only the start of the technical problems that would arise from this approach. An orderly transition would probably require something akin to a police state being imposed in the relevant countries and would be followed by large-scale political unrest. This short-term series of events would then be followed by years of legal wrangling about the status of euro debts (both sovereign and private).